What Not to Do
Hereâs a hypothetical case: Suzanne Baker opens a neighborhood cafĂŠ, Harvest Coffee Company, shortly after her divorce. Working seven days and 60 hours a week, she attracts loyal customers. The annual profit of the business grows to $80,000. Then, a chain coffeehouse decides to move into the neighborhood. Baker anticipates that it will offer her a buyout. She decides she wouldnât mind selling and sets her price at $240,000, or three yearsâ profits. She also plans to ask the new owner to hire her to manage the business.
âSelling a business isnât for the squeamish.â
The chain offers her $175,000, or less than â75% of her desired settlement.â Baker panics. If she refuses the offer, sheâs afraid the company will lower it or move into the neighborhood and run her out of business. Pressured, she gives in and takes the $175,000. The new owner doesnât offer her a position. Baker basically throws away $65,000 and the opportunity to work. If Baker had made a counteroffer she would have had a better chance of getting her asking price. She could have offered to stay on as manager as a âconcession.â
When Should You Sell?
The perfect time to sell never comes. Make sure you understand why you want to sell: Are you looking for wealth? Independence? Knowing what you want will help you get it. In addition, you cannot get the maximum payout if you do not understand valuation, that is, how to determine the current worth of your company. Buyers and sellers develop their own independent valuations. To get the ball rolling, ask prospective buyers to submit a term-sheet, which should, at a minimum, describe what they are purchasing, the price they are offering and how they will pay. The term-sheet is an initial offer. It does not lock you into anything.
Valuation
Valuing your business is a two-step process:
- âCalculate the average earnings before interest, taxes, depreciation and amortization (EBITDA) over a five-year period.â
- âMultiply the average earnings by a factor relevant to the industry.â For example, a database firm may sell for âanywhere between six to 14 times profit.â To use a âcomparable valueâ approach, check out relevant 10-Q and 10-K U.S. Securities and Exchange Commission filings, âfinancial search engines,â Hoovers.com, and EDGAR Online. Or, calculate your businessâs âemotional valueâ: the price that would make you happy. The buyer will not care about this, but it can figure in your calculations. Always value your business on the upside, using a positive forecast for the future.
Lassie, Get Help!
To sell your business you may need help from a âtax adviser, accountant, financial planning adviser, attorney, mentor, representative or agent, [and] others as needed for your specific industry.â For a mentor, find someone who has sold his or her own business. A representative is also known as an âM&A (mergers and acquisitions) specialist.â The best do not charge upfront fees but rather make their money on commissions.
âAbout 98% of us want to get out of our businesses â some of us right away, the rest of us at some point in the future.â
As in the rest of life, first impressions count. Make sure everything about your business is shipshape before you talk to buyers. How you present your company may determine how much you can get for it. Create a âbusiness overview documentâ that includes a âbusiness overview, description of services, clients, operations, information systems, management and employees, financial performance, strategic vision for combined companies, [and] summary.â
The âValue Identification Processâ (VIP)
To get top dollar for your business, use this seven-step Value Identification Process to make the buyer feel he or she is getting something special:
- âIdentify and develop USPsâ â âUnique selling propositionsâ are the assets and capabilities that make your business stand out from the crowd.
- âSelect your USPsâ â Focus on the ones that will be most meaningful to buyers.
- âBrand your USPsâ â Employ acronyms to make them more interesting to buyers, for example, ACE â âautomated cost efficiency.â
- âCreate a descriptor sheetâ â Use one to showcase each USP. Make it as compelling as possible. You may want to enlist an ad agencyâs help for this purpose.
- âCreate your visionâ â Detail your companyâs prospects. Then, write another version that describes the prospectâs business and your firm united.
- âCommunicate your messageâ â Include USPs in the business overview document.
- âPresent the organizationâ â âOrganizationâ sounds more impressive than âbusiness.â
Put Your Best Foot Forward
To motivate buyers, show them that your business does not need you to operate. No one wants to buy a âone-man show,â especially when that individual will probably move on. Develop a succession plan and share it with the buyer. Make sure your accounting is perfect. Have an independent accounting firm perform an audit of your company. Discuss your companyâs work flow â but donât reveal trade secrets or other proprietary information until you are well down the road with a prospect.
The Kinds of Buyers
Buyers fall into five categories:
- âDirect competitor buyersâ â These are your competitors.
- âComplementary service buyersâ â Firms that can benefit by purchasing your enterprise. Maybe you have customers they want, a distribution channel they can use or other assets they value.
- âFinancial buyersâ â These are entities such as âholding companies, private equity fund managers [and] venture capital groups.â
- âPreservation buyersâ â Organizations that will buy your business to protect their own positions in the marketplace.
- âOpportunity buyersâ â These include entrepreneurs as well as managers who are suddenly out of work.
Start a Bidding War
Follow these eight steps to encourage firms to bid against each other for your business:
- âDraw up your hit listâ â Include all your potential buyers.
- âSelect your leadâ â Target your top five prospects.
- âEngage the five in discussionâ â Contact the presidents. Provide âtop-line financial or growth information.â Expect strong initial interest if your company is solid.
- âSelect your stalking horseâ â Use a low-priority prospect to put pressure on the lead prospect.
- âGenerate the wantâ â For example, if a competitor wants to expand his or her business locations, stress the excellent locations you already have.
- âSpread the word â judiciouslyâ â Call the presidents of prospect firms, explain that other organizations are interested in buying your company and tell them that you want to explore all options. This approach can work wonders.
- âUse a go-betweenâ â Find a trusted individual outside your business (possibly your financial representative) to make the initial contact.
- âPlay all your rolesâ â Learn to be âpart businessman, part actor, part CIA operative and part poker face.â
Negotiate
Due diligence is crucial for both you and your buyer. Fully answer all your buyerâs questions. Work from the buyerâs due diligence list. At the same time, conduct your own due diligence to make sure you donât experience any surprises at closing time. Request three years of financial statements, balance sheets and annual reports. Ask the buyer about pending litigation and his or her short-term business. Gain as much information as you can; what you find out may come in handy during negotiations.
âIf your company is a moneymaker and youâre not eager to sell, youâre as alluring to a buyer as a shiny new lure to a hungry largemouth bass.â
Your every action, even phone calls and e-mails, can tip the negotiation one way or the other. Set your price. Make sure you understand the valuation formula youâve agreed upon with the potential buyer, who usually designates which method to use. Do not make the first offer; wait for your prospect to do it. The prospectâs term-sheet should present the lowest price you will accept. Compare your valuation against your buyerâs.
âMore than 90% of businesses do not identify and communicate all of their available value.â
Leverage your buyerâs vulnerabilities to get the best deal. During the negotiation, focus on one of your strong suits, such as higher margins or advanced technology. Emphasize comparable values if this enhances your position. Stress the possibilities for growth. Donât get cute, pushy or hung up on minor details. Keep cool. And, never forget about your employees. They helped you make the company into an attractive asset. Do everything you can to protect their jobs and finances.
The Payout
Receiving the payout is usually the most enjoyable aspect of selling your business, but you should still keep an eye on two issues: âthe timetable for payment and the nature of compensation.â Payments usually take one of three forms:
- âUpfront paymentâ â You get all your compensation in one lump payment. This is great if you plan to invest the money, but not so great if your business is poised for strong growth and a payout over time would mean more money in the long run.
- âEarn-outââ You bet that your company will become stronger and take your payments in installments according to an agreed-upon formula. This process enables you to disengage from the business over time, but itâs risky if the business does not do well, something you cannot control.
- âUpfront/earn-out comboâ â You get paid now and you get paid later.
âA good selling strategy for you would be to lead the buyer into feeling excited and optimistic about the deal, without pushing so hard that the buyer gets deal fatigue.â
The closing is a (tedious) formality. You have many documents to sign. The âasset or stock purchase agreementâ is the most important. It details your agreement, âincluding the representations and warranties,â as well as schedules, which include items such as âinventory, list of receivables...deposits, prepaid assets, contracts [and] customer lists.â
Mistakes That Can Kill Your Deal
You can do everything right â find a great buyer, present your business well, negotiate skillfully â but still inadvertently destroy your deal. Avoid these common blunders:
- âThe âYak Yakâ Factorâ â You have not sold your business until you have signed the contracts and received your payout. In the meantime, you have a business to run. Donât cause anxiety among your employees about new ownership of the firm before it is necessary. If you tell even one person about your sales plans prematurely, the news will spread fast. Morale may plummet and important employees may leave. Suddenly, your business is not as attractive as it was.
- âInvisibilityâ â Even if you hire an M&A specialist to negotiate for you, donât drop out and become invisible. You, not your consultants, have the most to gain from the sale. Play an active, upfront role.
- âThe âYee Haw!â Factorâ â Keep your eye on the ball; donât get carried away by the vision of all the money youâll make when the deal goes through.
- âDeal fatigueâ â Selling a business is a complex process that takes time. Sometimes, one or both parties get so tired of the process that someone backs out. To keep mentally fit, take occasional breaks. Eat right. Get enough rest. Exercise.
âFor someone who has been totally involved in starting, growing and running a business, getting out of the game suddenly can be like leaving a roller coaster on impulse.â
Be prepared for a psychological letdown once you sell your business. Ease your withdrawal by spending a little time at the business after the new owner takes over. Youâll see that the company can continue to thrive under the new management, even though itâs no longer your baby. The best way to deal with the transition phase is to have a plan in place for your next steps.